Introduction to Oil Company Financial Analysis

Description

Basic principles are widely understood in the financial industry, but the terminology and analytical techniques can vary greatly. This book is written for the nonfinancial shareholders, managers, and oil company employees interested in the forces that influence stock values. The bottom line in any company is expressed in the language of finance. This book explains financial concepts in a nontechnical, practical way so that nonfinancial professionals and others may understand and appreciate this aspect of the business. When the first edition of this book was written, companies disclosed substantially less information than what is available today. This additional information allows a better understanding of the financial status and health of a company. But there is still room for improvement.

1. Introduction
Oil Prices
Diminishing Supplies and Increasing Demand
Mega Mergers
The Stock Market
Fundamentals of Valuation
Market Value
Fair Market Value
Technical Analysis
Dow Theory
Fundamental Analysis
The first step—Economic conditions
The second step—Industry analysis
The third step—Company analysis
Asset- vs. Income-Based Techniques
Asset-based valuation concepts
Control premium
Income-based valuation concepts
Efficient Market Hypothesis
Random Walk Theory
Catch-22
Niels Bohr—Early EMH proponent
Stock Quotations
Accounting Value vs. Economic Value
Future and Present Value Theory
Future value
Present value
Annuities
Perpetuity
Present value tables
Internal Rate of Return
Cost of Capital
Cost of debt
Cost of preferred stock
Cost of equity
Capital asset pricing model
Summary
Accounting Systems for Oil and Gas
Generally Accepted Accounting Principles
Accounting concepts
Governance, transparency, and disclosure
Reserve Recognition Accounting
FC and SE Accounting
SE accounting
FC accounting
Ceiling Test Limitation
Book value, SEC value, and FMV of reserves
Depreciation, depletion, and amortization
Cost Depletion and Percentage Depletion
Summary and Key Concepts
Financial Statement Analysis
Annual Report
The Income Statement
The Balance Sheet
The Statement of Cash Flows
Form 10-K
Form 10-K Oil & Gas Reserves
Financial Analysis
CVX financial statements
Quick look
Ratio Analysis
Analytical perspectives
Ratios
Liquidity ratios
Profitability ratios
Activity ratios
Dividends
Valuation ratios
Energy ratios
Ratio Roulette
CVX
CVX Highlights 2001
Summary and Key Concepts
How much is too much debt?
5. Valuation of Common Stock
Guidelines for Estimating Value
IRS guidelines
SEC guidelines
Book Value
Book value multiple
Debt-adjusted book value multiple
Adjusted book value
O&G Properties
Long-term Investment in Stock
Off-Balance-Sheet Activities Involving the Cost & Equity Methods of Accounting
Consolidation and minority interests
Off-balance-sheet assets and liabilities
Long-term leases
Synthetic leases
Litigation
Environmental Liabilities
Exxon Valdez spill in the Prince William Sound, 1989
DR&R—Abandonment
Off-Balance-Sheet Commitments
Drilling Commitments
Summary
Discounted cash flow analysis
Adjustments
Net income
DD&A
Deferred taxes
Extraordinary items
Other adjustments
Exploration expenses
Research and development
Interest expense
Free cash flow
Operating income multiple
Comparable sales
Replacement value
Combined appraisal techniques
6. Competitive Comparisons
Individual Investment
Institutional Investment
Employment
Benchmarking
M&A Potential
Identification of Peer Group
Line of business
Size
Market or location
Other considerations
Identification of Comparison Criteria
Study the sector
Sources of information
Identify the industry or sector concerns
Integrated O&G industries
E&S
E&P
Drilling
Refining and marketing
Utilities
7. Segment Valuation
Proved Reserves
Acreage
Transportation
Pipelines
Tankers
Refineries
Industry Structure
Financial Analysis and Evaluation of Refineries
Nelson Complexity Index
Refinery value dollars per barrel per stream day
Valuation of Chevron and Texaco refinery segments
Marketing Outlets
Gas stations
C-stores
Truck stops and travel plazas
Hypermarkets
Marketing Trends
8. Value of Reserves-in-the-Ground
Value of an Oil Discovery
Value of Producing Oil Reserves
Value of a Gas Discovery
9. Corporate Restructuring
The Language of Corporate Restructuring
History
Merger waves
M&A driving forces
Spin-off MLP
LBO
Share Repurchase
Targeted Stock Restructuring
Fair Price Requirement
10. Legal and Tax Environment for Mergers
Laws and Regulatory Agencies
Sherman Antitrust Act of 1890
Clayton Antitrust Act of 1914
State antitrust “Blue Sky Laws” and M&A legislation
FTC Act of 1914
Securities and Act of 1933
Securities & Exchange Act of 1934
The Celler-Kefauver Antimerger Act of 1950
Uniform Securities Act of 1956—“Blue Sky Laws”
National Securities Markets Improvement Act of 1996
The Williams Act
Hart-Scott-Rodino Act of 1976
Tax Environment
Accounting methods
Pooling of interests
Purchase method
The Transaction Structure
Tax-free transaction
Types of corporate reorganization
MLP
SOX
Conflict of interests
GAAP
11. Valuation of Bonds and Preferred Stock
Bonds
Bond yields
Bond ratings
Preferred Stock
Cumulative preferred stock
Convertible preferred
Tax considerations
Appendix 1 Abbreviations
Appendix 2 World Energy Statistics
Appendix 3 Production Statistics for Key Energy States 1989, 1999
Appendix 4 State Severance and Ad Valorem Taxes 2001
Appendix 5 Crude Oil & Gas Prices
Appendix 6 Energy Conversion Factors
Appendix 7 Present Value of One-time Payment
Appendix 8 Present Value of an Annuity
Appendix 9 Natural Gas Products
Appendix 10 Information Sources
Appendix 11 Reporting Systems & Statements
Appendix 12 Enron & SPEs
Appendix 13 Stock Tables Explained
Appendix 14 Charts & Technical Analysis
Appendix 15 Energy Sector P/E Ratios
Appendix 16 The Reinvestment Assumption
Appendix 17 Value of Information in the Public Domain
Appendix 18 Expanded Definitions of Key Terms
Appendix 19 M&A Jargon
Glossary

Additional information